June 3, 2012:
Recessions and depressions teach us one thing quite clearly: no country or
region is immune from its global contagion. And the recent global economic
crisis has brought to the fore the vulnerabilities of the Indian economy as
well.
Until recently, India
was seen as an economy which was far more resilient to such global shocks. In
fact, it was deemed as an economy which had the potential to lead the global
financial markets out of a grave crisis. But all that seems to be behind us now.
The Indian economy is confronting huge problems, which were not deemed
possible couple of years ago. Foreign direct investments into the country
slipped. Inflation became endemic. Interest rates shot up, transforming India into a
high cost economy.
Growth in exports waned while imports shot through the roof. The balance of
trade worsened. Current account deficit touched critical levels. The value of
the Indian rupee lost ground to a rapidly appreciating dollar. The growth
momentum faltered as India
confronted a major slowdown.
In 2009 and 2010 India
was perceived as the country which had withstood the global contagion
efficiently while several other emerging and developing economies were seen vulnerable.
The situation has changed dramatically since then.
ADB study
A recent paper from the Asian Development Bank, ‘How can Asia
respond to the global economic crisis and transformation?' addresses the same
question.
Talking about the recent crisis, the paper says: As maybe expected, more
export-oriented newly industrialised economies suffered more than the middle
income Association of Southeast Asian Nations (Asean) economies during these
periods.
It was mainly growth in global trade which accelerated the economic
development in the Asian region. Now, it is the very same trade which is
exposing the vulnerabilities of the region. But there is nothing new in this.
There have been instances of the US and Euro Zone shocks impacting
Asian economies during the last four decades, the ADB report pointed out.
What is different this time is that the global economy has become far more
integrated and cohesive during the last two decades. Liberalisation and
globalisation have become accepted mantras for accelerated economic
development, with most Asian countries pursuing them as the stepping stone to
economic prosperity.
The People's Republic of China
remained the sole exception. However, even in the case of China , the
sensitivity to recession has grown in consonance with its export growth.
But China
has a huge domestic market which has helped it to tide over the crisis to some
extent. Similar was the case of India
and Indonesia .
These were economies which revealed minimal output contractions, the ADB report
said. The resilience was more in evidence in the years 2009
and 2010. But later, India
began to reveal increasing vulnerabilities.
The ADB prognosis is that these countries would continue to be resilient,
should the global slump repeat in 2012. The prognosis was based on further
diversification of Asia 's markets. Also there
was a sudden spurt in intra-regional trade while trade with the US and Europe
waned.
During the 2008-09 global financial crisis, economic growth in the region
collapsed as demand for Asian exports contracted due to weak global growth.
There was also a collapse of trade financing as global liquidity further
contracted.
As a consequence, economies with closer trade ties with the US and Euro
Zone were the most severely affected. Singapore ,
Hong Kong , China ,
Malaysia , and Thailand
recorded large declines in gross domestic product (GDP) growth in 2008 and
2009.
A prolonged or deeper Euro Zone sovereign debt crisis will affect the
region through the trade channel even as demand from developed countries
continues to fall.
For instance, Asian region's exports to the Euro Zone and US have declined
from 33.8 per cent of total exports in 1999 to 24.5 per cent in 2010.
Changing trade pattern
This was made up to a good measure by increased domestic and intra-regional
trade. The share of intraregional exports to total exports in emerging East Asia rose from 36.9 per cent to 44.2 per cent during
the same period.
Also, as the fortunes of the US-Euro Zone waned, stronger trade ties were
being developed with Latin America and Africa .
The extent of the crisis in Europe as well as the US economic performance will largely determine
how Asia is impacted.
Should downside risks materialise, the Euro Zone could fall into a deep
recession and drag the US
economy to lower growth or even recession. A low-probability scenario would
find both the Euro Zone and the US
in deep recession, with output reaching the economic troughs of 2009, the ADB
report said.
The contagion could be critical for Asia, but much more so for India . While
most economies of Asia have begun putting the crisis of 2008-09 behind them,
the effects are yet to wear off from India . Economists had earlier
ascribed India 's
rapid economic growth story to increased inflow of foreign direct investments.
Foreign direct investments tend to play a key role in the development of an
emerging economy – because it ensures rapid and efficient transfer and adoption
of “best practices” across borders. This often resulted in better quality
products using superior technology being produced in the recipient country at
lower costs.
But in the Indian context, inflow of FDI has whittled down. Balance of
trade has worsened. Current account deficit has grown to alarming levels and a
crisis seems to be emerging.
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